Estate Planning for Restricted Stock Units: Maximizing Wealth and Minimizing Taxes

Short Answer:

Estate planning for Restricted Stock Units (RSUs) requires strategic thinking to address tax implications, vesting schedules, and the transfer of company stock. Incorporating tools like trusts, tax elections, and life insurance can help manage RSUs effectively. Advanced planning ensures that these assets are distributed according to your wishes and minimizes the tax burden for your heirs.

Introduction: Navigating the Complexities of RSUs in Estate Planning

Restricted Stock Units (RSUs) are increasingly common as a form of compensation offered by employers, particularly in private companies or startups. RSUs provide employees with company stock as part of their equity compensation. However, when it comes to estate planning, RSUs present unique challenges. Whether they are unvested or vested, these units can have a significant impact on your wealth and your heirs' financial future.

Estate planning for RSUs requires a comprehensive approach that takes into account not only the value of the stock but also the tax implications, vesting schedules, and the risk of forfeiture. It’s important to incorporate strategies that align with your long-term goals and minimize the financial burden on your family.

In this blog, we will explore the key considerations and strategies for managing RSUs in your estate plan, including planning tools like revocable living trusts, tax elections, and even life insurance. Let’s dive into how to optimize your RSUs for the future.

Understanding RSUs – What They Are and How They Work

Before diving into the intricacies of estate planning, it’s important to understand what RSUs are and how they function. RSUs are a form of compensation that companies offer employees in the form of company stock. Unlike stock options, employees do not have to purchase the stock; they receive it once certain conditions are met, typically after a period of vesting.

How RSUs Work:

• Vesting Schedule: RSUs typically vest over time, often linked to a performance goal or a time-based schedule. Once the units vest, the employee receives actual shares of the company stock.

• Ordinary Income Tax: RSUs are subject to ordinary income tax once they vest, and the value of the shares at the time of vesting is taxed as ordinary income.

• Transfer of RSUs: Post-vesting, RSUs are treated as regular company stock and can be transferred to beneficiaries, but unvested RSUs cannot be transferred or inherited.

The Role of RSUs in Estate Planning: RSUs are a significant asset, but they also come with complexities. For one, unvested RSUs cannot be transferred upon your death—they are typically forfeited unless specific planning strategies are implemented. For vested RSUs, the challenge lies in managing the associated taxes and ensuring that your heirs are able to access the stock without facing undue financial strain.

Tax Considerations and Election Strategies for RSUs

One of the most important factors to consider when planning for RSUs is the tax implications. Upon vesting, RSUs are taxed as ordinary income, which can lead to a significant tax burden. However, there are strategies available to help manage this burden, including making tax elections that may minimize taxes in the long term.

Tax Implications of RSUs:

• Income Tax: Upon vesting, RSUs are taxed at ordinary income tax rates based on the market value of the shares at that time. This can lead to a hefty tax bill, especially if the company stock is valuable.

• Estate Tax: When the RSUs are passed on to your heirs, they may also be subject to estate taxes. The stock’s value at the time of your death is included in your gross estate for estate tax purposes.

• Tax Elections: One strategy to mitigate taxes is the 83(i) election, which allows employees to defer taxes on RSUs that are not subject to the Accelerated Vesting rule. This election is available only for private companies and can provide significant tax deferral.

Advanced Estate Planning Strategies for RSUs:

• Spousal Lifetime Access Trust (SLAT): A SLAT can be used to remove RSUs from your taxable estate while still providing your spouse with access to the assets during their lifetime.

• Intentionally Defective Grantor Trust (IDGT): This trust allows for the sale of RSUs to the trust, removing the stock from your estate while still retaining control over the assets.

Incorporating RSUs into Your Estate Plan: Trusts, Beneficiaries, and Liquidity

RSUs are a significant part of your estate, and ensuring they are transferred properly to your beneficiaries is key to effective estate planning. Trusts can help facilitate the transfer of RSUs, especially in cases where the stock is still unvested at the time of death.

Estate Planning Tools for RSUs:

• Revocable Living Trust: A revocable living trust allows you to transfer your vested RSUs to your beneficiaries without the need for probate. This can help ensure a smooth and efficient transfer of assets.

• Irrevocable Trusts: For advanced estate planning, irrevocable trusts can be used to remove RSUs from your taxable estate. These trusts can help manage the RSUs during your lifetime and ensure that they are passed to your heirs in the most tax-efficient manner.

• Family Partnerships: A family partnership can be used to hold RSUs, allowing you to pass on the company stock to your heirs while potentially minimizing estate taxes and providing liquidity for your estate.

Liquidity Planning for RSUs: One of the challenges with RSUs is that they may not be liquid assets until they vest. This means your estate may face liquidity challenges when it comes time to pay for estate taxes or distribute assets to your heirs. Life insurance through an Irrevocable Life Insurance Trust (ILIT) is one strategy to provide liquidity, ensuring that your family doesn’t have to sell company stock to meet tax obligations.

Charitable Giving with RSUs: A Tax-Efficient Strategy

Charitable giving is another estate planning strategy that can help mitigate the tax burden associated with RSUs. By donating RSUs to charity, you can avoid capital gains taxes and receive an income tax deduction for the value of the stock.

Tax-Efficient Charitable Giving Strategies:

• Donor-Advised Fund (DAF): A DAF allows you to donate RSUs to charity while retaining the ability to recommend how the funds are used. This provides both immediate tax deductions and long-term control.

• Charitable Remainder Trust (CRT): A CRT allows you to donate RSUs to charity while retaining an income stream for yourself or your beneficiaries during your lifetime. After your death, the remainder of the trust goes to the designated charity.

By using charitable giving strategies, you can reduce your estate taxes while supporting causes that are important to you.

Conclusion: Planning Ahead for Your RSUs

Restricted Stock Units are a valuable component of many people’s compensation packages, but they come with unique challenges when it comes to estate planning. From managing taxes to ensuring a smooth transfer to your beneficiaries, there are several strategies you can use to protect your RSUs and maximize their value for your family.

At Moravec Varga & Mooney, we are knowledgeable in advanced estate planning techniques, including the management of RSUs, trust administration, estate taxes, and liquidity planning. If you have RSUs as part of your compensation, it’s essential to have a well-thought-out plan in place to ensure that these assets are handled efficiently and according to your wishes.